4. Building Competitive Advantage Through Functional-Level Strategy

Value Chain Perspective

Achieving Superior Efficiency Economies of scale Unit cost reductions associated with a large scale of output Ability to spread fixed costs over a large production volume Ability of companies producing in large volumes to achieve a greater division of labor and specialization Diseconomies of scale Unit cost increases associated with a large scale of output

Production and Efficiency A typical long-run unit-cost curve:

Diseconomies Why do diseconomies of scale occur?

Production and Efficiency: Learning Effects

Production and Efficiency: The Experience Curve

Experience Curve Dangers of complacency with the experience curve It will bottom out New technologies can make experience effects obsolete Some technologies may not produce lower costs with higher volumes of output Flexible manufacturing technologies may allow small manufacturers to product at low unit costs

Production and Efficiency: High Volume≠ Cost Advantage

Manufacturing and Mass Customization Flexible manufacturing technology (lean production) Reduced setup times Increased machine utilization Improved quality control Lower inventory levels Mass customization Low cost and product customization

Production and Efficiency: Flexible Manufacturing

Marketing and Efficiency Marketing strategy: Product design Advertising Promotion Pricing Distribution Customer retention

The Relationship Between Average Unit Costs and Customer Defection Rates

The Relationship Between Customer Loyalty and Profit per Customer

Materials Management, JIT, and Efficiency Getting materials into and through the production process and out through the distribution system to the end user. Just-In-Time (JIT) Reduce inventory holding costs by having materials arrive JIT to enter the production process. JIT risk: There are no buffer stocks for nondelivery or unanticipated increases in demand.

R&D Strategy and Efficiency Design easy-to-manufacture products Reduce numbers of parts per unit. Reduce assembly time. Closely coordinate R&D and production activities. Pioneer process innovations Innovations create competitive advantage through gains in process efficiencies.

Human Resource Strategy and Efficiency Ways to increase employee productivity and lower unit costs: Provide training that upgrades employee skills. Establish self-managing teams to gain a more flexible work force and increase productivity. Use pay-for-performance incentives for teams to encourage meeting productivity and quality goals.

Information Systems, the Internet, and Efficiency Benefits of moving operations to the Internet: Cost savings in ordering and customer service. Reduced human resource requirements. Lowered internal and back-office costs. Increased employee productivity. For example, Cisco and Dell

Infrastructure (Leadership) and Efficiency Achieving superior efficiency requires a company-wide commitment built through top management leadership in: Articulating the vision. Facilitating cross- functional cooperation.

Summary

Achieving Superior Quality Total Quality Management (TQM): All company operations focused on improving product and service quality. Deming’s Five-Step “Chain Reaction”: Improved quality reduces costs. Improved productivity. Higher market share. Increased profitability. More jobs created.

Deming’s Revolutionary Ideas on Quality Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships. The bulk of the causes of low quality and productivity belong to the system and thus lie beyond the power of the work force. Drive out fear, so that everyone may work effectively for the company Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place. End the practice of of awarding business on the basis of price tag. Instead, minimize total cost. Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly reduce costs. Break down barriers between departments. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job. Institute training on the job to provide tools. Six sigma – TQM without the philosophy?

Textbook ideas on implementing TQM Build organizational commitment to quality Focus on the customer Find ways to measure quality Set goals and create incentives??? Solicit input from employees Identify defects and trace them to source Improve supplier relations Design for ease of manufacture Break down barriers between functions

Attributes Associated with a Product Offering

Achieving Superior Quality (cont’d) Developing Superior Attributes Learn which attributes are most important to customers Design products and associate services to embody the important attributes Decide which attributes to promote and how best to position them in consumers’ minds Monitor competition for improvement in attributes and development of new attributes

Achieving Superior Innovation Innovation can Result in new products that better satisfy customer needs Improve the quality of existing products Reduce costs Innovation can be imitated so it must be continuous Successful new product launches are major drivers of superior profitability

Failure to Innovate Uncertainty Poor commercialization Quantum innovation Incremental innovation Poor commercialization Poor positioning strategy Technological myopia Slow to market

The Development Funnel

Achieving Superior Innovation Building competencies in innovation: Building skills in basic and applied research Project selection and management Cross-functional integration Product development teams Partly parallel development process

Sequential and Partly Parallel Development Processes

Achieving Superior Customer Responsiveness Developing a customer focus: Top leadership commitment to customers. Employee attitudes toward customers. Bringing customers into the company. Satisfying customer needs: Customization of the features of products and services to meet the unique need of groups and individual customers.

Responsiveness ctd.

Exercise You are the management of a startup that produces disk drives in an industry with short life cycles, intense price competition, high fixed costs, and substantial economies of scale. OEMs put a lot of pressure on you to deliver products on time What functional competencies are the most important to build? How will you design your internal processes that ensure those competencies are built?

Closing Case Reinventing Levi’s